Lanka Rating Agency places Lanka IOC PLC’s ratings on negative watch

Lanka Rating Agency (LRA) has placed Lanka IOC’s (LIOC) respective long and short-term stand-alone credit profile (SACP) ratings of AA+/P1 on a negative rating watch (with parent support AAA/P1/ negative rating watch). 

Negative rating watch reflects the pressure on business profile due to increased fuel import levy and reduced auto fuel selling price along with notable decline in the performance in FY Mar 2015. 

However, this is expected to ease off post implementation of pricing formula. Rating watch will be lifted if the pressure on the Company’s business and financial profiles ease off in coming quarters. LRA will continue to monitor the performance of LIOC and further deterioration of performance, debt protection metrics and capitalisation will trigger a negative rating action.

LIOC is mainly involved in distribution of auto-fuel and also has significant presence in lubricants, bitumen and oil bunkering markets.

The ratings were upheld by the company’s notable presence in auto-fuel distribution, bitumen and lubricants markets. Sri Lankan auto fuel distribution segment is a duopoly market and LIOC is the second auto fuel distributor in Sri Lanka with a market share of 18% after the State-owned Ceylon Petroleum Corporation (CPC). 

Further, LIOC has significant presence in the bitumen segment. However, the bitumen segment became highly competitive following the licenses granted to small and medium sized players. On the same note, the company’s lubricant brand SERVO has a market presence of 15.80% in lube segment and is the 2nd largest domestic player.

Further, ratings supported by the company’s strong financial profile, debt protection metrics and liquidity. LIOC’s financial profile deemed strong. The Group’s gearing has clocked in at 0.22 times in FY Mar 2015 (FY Mar 2014: 0.36 times). 

On the other hand, the company’s healthy cash positions (cash and cash equivalents) reflected in negative net gearing (total debts excluding cash) of 0.21 times in FY Mar 2015 (FY Mar 2014: negative 0.07 times). As of end-Mar 2015 the company’s total debts amounted to Rs. 4 billion (end-Mar 2014: Rs. 6.12 billion). 

Further, LRA notes that the debts are short-term in nature and mainly used for working capital purposes (fuel import bills). On the same note, the company’s debt protection metrics has declined which reflected in its Fund from operations (FFO) debt coverage of 0.25 times in FY Mar 2015 from 0.91 times in FY Mar 2014. 

Adverse 4Q FY Mar 2015 performance has squeezed the company’s performance and FFO debt coverage during the period. 

LRA expects the Government’s tax revision on fuel based products to affect the company’s performance. However, the Government’s intention of implementing pricing formula for fuel selling price could improve the company’s financial performance. 

Concurrently, the company’s liquidity position is also viewed as strong. As at end-Mar 2015, LIOC had cash and cash equivalents (CCE) of Rs. 7.75 billion, compared to short-term debt of Rs. 4 billion which translated into a strong CCE to short-term debt ratio of 1.94 times in FY Mar 2015 (FY Mar 2014: 1.43 times). In addition, LRA also notes that the company has unutilised funding lines of around $ 150 million as at end-Mar 2015 (Rs. 20.3 billion).  

Meanwhile, the ratings are weighed down by the company’s vulnerability to fluctuations in raw-material prices and forex risk. LIOC is dependent on imported petroleum products for its production and distribution, which exposes the company to fluctuations in global commodity prices and foreign exchange (“forex”) risk.

Although LIOC has the ability to pass on cost increases to customers, its market presence could be somewhat affected given that most of the petroleum products it sells are generic in nature. On the other hand, the company has made forex gains in the past two years by effective forex management.